China eases mortgage loan rate guidance to spur demand

IMF lifts weighting of dollar, Chinese yuan in SDR basket

FE Team | Published: May 15, 2022 21:34:09

BEIJING, May 15 (Reuters): Chinese financial authorities on Sunday allowed a further cut in mortgage loan interest rates for some home buyers, in another push to prop up its property market and revive a flagging engine of the world's second-largest economy.
For purchases of first homes, commercial banks can reduce the lower limit of interest rates on home loans by 20 basis points, based on the corresponding tenor of benchmark Loan Prime Rates (LPRs), the People's Bank of China (PBOC) and China's Banking and Insurance Regulatory Commission said in a statement.
The cut aims to support demand and promote stable and healthy development of the real estate market, the statement said.
In its monthly fixing in April, the PBOC kept its one-year LPR unchanged at 3.70 per cent and the five-year LPR, typically used as a benchmark for mortgage loans, steady at 4.60 per cent.
Banks in many cities cut mortgage rates in the first quarter following calls from authorities to support buyer sentiment in a market rocked by a liquidity crunch and troubled developers last year, and now by nationwide Covid-19 outbreaks.
"Policies including lowering down-payments, lowering mortgage interest rates, loosening restrictions on secondhand housing sales and loosening purchase restrictions will create better conditions for active market transactions in mid-to-late May," said Yan Yuejin, research director of Shanghai-based E-house China and Development Institute.
The latest loan guidance came after central bank data on Friday showed new bank loans plunged to their lowest in more than four years in April, as varying degrees of Covid lockdowns in dozens of cities curbed lending, with mortgage loans contracting.
To free up more funds for lending, the PBOC on April 25 reduced the amount of cash that lenders must set aside as reserves. More modest easing measures are expected as authorities vow to roll out more policies to support the broader economy.
But despite the easier mortgage loan guidance, much depends on the banks.
"During lockdowns, banks tend to be more risk-averse," said Iris Pang, senior Greater China economist at ING, wrote in a note on Friday after the central bank data.
"They have been told to keep past-due loans on their books. Under these circumstances, banks have become unwilling to create new loans, as that would mean taking on more risk by getting new loans and then waiting for them to become past due if lockdowns continue."
Meanwhile, the International Monetary Fund (IMF) said on Saturday it has increased the weighting of the dollar and Chinese yuan in its review of the currencies that make up the valuation of its Special Drawing Rights (SDR), an international reserve asset.
The review is the first since the yuan, also known as the renminbi, joined the basket of currencies in 2016 in what was a milestone in Beijing's efforts to internationalise its currency.
The IMF raised the US currency's weighting to 43.38 per cent from 41.73 per cent and the yuan to 12.28 per cent from 10.92 per cent. The euro's weighting declined to 29.31 per cent from 30.93 per cent, the yen's fell to 7.59 per cent from 8.33 per cent and the British pound fell to 7.44 per cent from 8.09 per cent.
The IMF said in a statement its executive board had determined the weighting based on trade and financial market developments from 2017 to 2021.
"Directors concurred that neither the Covid-19 pandemic nor advances in Fintech have had any major impact on the relative role of currencies in the SDR basket so far," the IMF said.
Although the yuan's value has declined recently, it has risen roughly 2.0 per cent against the dollar since 2016, and appreciated about 6.0 per cent against its major trading partners.
In a statement on Sunday, the People's Bank of China said China will continue to promote the reform and opening of its financial market.
The updated weightings take effect on Aug 01.